School Boards and the 403(b) Plan

By Charles K. Trainor

Does your district have a 403(b)? It’s not the model number of the cafeteria refrigerator. Nor is it a shortened vehicle identification number for the latest addition to the bus fleet. It is a tax-sheltered, retirement savings plan for public school employees and certain other tax-exempt organizations.

It is similar to the 401(k) plan that often replaces or supplements traditional defined benefit or defined contribution pension plans used by many corporations. Both 403(b) and 401(k) plans allow employees to reduce their salary with pretax contributions that reduce current income tax payments.

Another significant 403(b) benefit is that it allows investments to grow tax-free until funds are withdrawn during retirement. It is important to note, however, that if funds are withdrawn before age 55, penalties may be assessed. Finally, since most retirees no longer earn a full salary, they may be in a lower tax bracket, which means money withdrawn after retirement will be taxed at a lower rate.

These advantages make 403(b) plans very attractive to those who wish to defer, and possibly reduce, income tax payments while saving for retirement.